Poland's sugar industry: barometer of change - dramatic changes taking place in Central and East European countries and republics of former Soviet Union have significant effect on agricultural commodities traded in world markets, with Poland as largest sugar producer in Central and Eastern Europe; Poland's agricultural policy still developing as sugar factories operate below capacity because of insufficient beet supplies due to low prices paid to farmers; new policymakers plan for conversion to market economy, moving toward private control of resources; agricultural reforms expected to improve output - U.S. Dept. of Agriculture, Economic Research Service Report

Agricultural Outlook, April, 1992

The profound changes taking place in former centrally planned economies have significant implications for several agricultural commodities traded in the world markets. The sugar sector can serve as a barometer of the direction of agricultural policy in the evolving market economies. The countries in Central and Eastern Europe and the former Soviet republics together produce between 13 and 15 million metric tons of sugar, raw value, or about 12-14 percent of the world's annual sugar output. These countries consume over 18 million tons of sugar annually, on average.

Sugar price intervention has a long history and tradition worldwide. Since sugar is often a key commodity politically, many countries strive to be self-sufficient in its production. The centrally planned economies were no exception to the trends in most other countries, and a look at Poland's sugar regime illustrates the transition underway from the situation that has prevailed in most centrally planned economies.

Poland exemplifies both the problems and prospects for sugar regimes in Central and East European countries (CEE's) and the republics of the former Soviet Union. Until the early 1980's, the retail price of sugar had been fixed at 10.5 zlotys per kilogram. Through the 1980's, the retail price steadily rose, and by 1988 the fixed price was 165 zlotys. Sugar price controls were lifted on August 1, 1989, and by 1990 the average price stood at 5,000 zlotys per kilogram.

Around this time, Poland's economy was undergoing radical change. Beginning January 1, 1990, Poland embarked on a shock therapy path toward a market economy. Prices were liberalized and subsequently skyrocketed, and the exchange rate was allowed to float. The resulting fall in real income in Poland led to declining consumption of most commodities, including sugar. The exchange rate also rose: at the exchange rate of about 10,000 zlotys per dollar in late 1990, for example, a kilogram of sugar cost 50 cents retail (23 cents a pound).

Reforming an Antiquated Agriculture

Poland is the largest sugar producer in Central and Eastern Europe, its roughly 1.5 to 2 million metric tons of sugar a year comparable to the output of Italy. Poland has between 350,000 and 400,000 sugarbeet farmers. (The U.S. total is less than 10,000.) The average size of all farms is about 7 hectares (17 acres), and average sugarbeet area is about 1 hectare (2.5 acres).

The typical farm still uses horses for field work and hand labor for part of the beet harvest. Most farms in Poland are privately held, so that the task of privatizing farms is not as burdensome as in some of the other East European countries. Farms in Poland typically comprise several small parcels of land spread around a small village, and travel between parcels increases field costs.

Most of Poland's 78 sugarbeet factories were built before World War II and are small and inefficient; sugar recovery losses are about twice as high as in neighboring countries of Western Europe. By way of contrast, the U.S. has about half as many factories as Poland and produces more than twice as much sugar.

No minimum price is in effect for sugarbeets. Some factories are having difficulty persuading farmers to grow beets, and organizations of beet farmers have protested against low prices. In some regions, factories now have to compete for beets, with the result that beets are often transported much further than necessary and some factories are operating below capacity.

Perhaps the biggest problem facing Polish agriculture is the large change required by farmers to adjust to a market mentality. In the past, farmers were accustomed to producing a quantity specified by the state, at any cost. Since pricing was based partly on the cost of production, farmers would be assured of returns adequate to cover costs. Quality did not matter--only quantity.

Risk has also increased. It is now possible, for example, that a factory accepting delivery of sugarbeets could go bankrupt. If this occurred, not only might a sugarbeet producer not be compensated, but the farmer would have to switch to other crops unless other factories were close enough.

Individual sugar factories, which had previously been organized into 11 "groups," have been made basically self-governing. The practice of forcing factories to purchase and refine raw sugar imported from Cuba has ended. The reemergence of "sugar banks," a type of entity that existed before World War II, should provide the factories with credit and some coordination functions.

The sugarbeet factory at Lublin is typical. In 1990, the factory produced 50,000 tons of sugar, receiving beets from about 15,000 farmers. At present there has been no feasible way for the factory to pay farmers on the basis of quality, as well as quantity, so farmers have little incentive to improve sucrose content or apply more efficient management practices. This will change as factory managers attempt to improve efficiency, but they still face large hurdles.